Five Myths about the Business of Sanitation

A recent study by the Water and Sanitation Program (WSP) and International Finance Corporation (IFC) of the World Bank surveyed over 100 firms providing on-site sanitation services to the base of the pyramid in four countries (Bangladesh, Indonesia, Peru and Tanzania) and debunked widely held beliefs on the motivations and potential of firms in the growing sanitation market.

1. Firms serving the base of the pyramid are predominantly micro firms because the market is small. Myth. The market is huge. Between 2000 and 2010, the study countries’ market is estimated at US$300 million a year, about five times the annual trading volume in the Dar es Salaam Stock Exchange. Considering people in the four countries that do not yet have access to improved sanitation, the potential market is even larger – estimated at US$2.6 billion. Of this potential, the poor represent a market worth US$700 million. The paradox is that sanitation is a large market dominated by small players. Why? It seems that there are presently no well-resourced players for whom on-site sanitation is a large enough business to warrant intensive efforts to develop and market solutions and coordinate activities across the supply chain. Eighty percent of firms catering to the poor are micro and small firms, constrained by capital, technology and in geographical reach. For larger players, the opportunity is not known and untested, implying significant investment outlays for research, development and commercialization to move into this business.

2. Sanitation is a low margin business. Myth. Actually, sanitation firms’ margins per sale can climb relatively high up to 40% with space to increase by value-adding through labor. The range of firms’ margin is between 15% and 40%, quite similar to margins in construction supply retail. Micro sanitation firms have already taken advantage of the dramatic increases in contributing margins by moving from manufacture and sale of sanitation components to manufacture of components and installation (adding labor). However, the earnings of an average firm tend to be modest. The challenge is in their low volume of sales. On average, most of the 100 firms surveyed sold between 10 to 15 units each month. As most of the firms surveyed are micro-firms that have limited labor and capital, plus the near absence of marketing activities, they are unable to realize the financial advantage of such margins.

3. Lack of interest in sanitation is driven by the lack of money. Myth. Sanitation is a low expenditure priority for households, but the lack of interest is not necessarily driven by lack of money. Sanitation remains a low priority even where money is not an issue. In the four countries studied, out of the 227 million people without access to improved sanitation, over 65% are non-poor and living above the poverty line. In Tanzania, 400,000 rural households wealthy enough to have cement floors in their homes do not have improved sanitation. Among the poor, the study found that they spend as much on mobile phones each year as it would cost to install a basic sanitation system. The poor are faced with limited interesting sanitation options and significant coordination challenges, requiring a huge amount of motivation and capabilities on their part to overcome. For poor households, there seems to be just too many reasons not to improve sanitation and not enough compelling options to do so.

4. Poor households are looking for ‘improved’ sanitation.Myth. Poor households do not reference their desires against what governments or international standards define as “improved sanitation.” To get households to invest in sanitation, they need an offer they cannot refuse: a quality, high value facility that is within their reach. In Peru, households at all income level that have a regular supply of water (80% of all households) aspired to a bathroom with a sink and a shower and regarded latrines as a symbol of poverty and social exclusion. The study found that in general, poor households aspired to a much higher level solution and knowingly quoted prices of what they might pay to get their ‘ideal’ that comprised a large portion of their average income. Some households, sensing the futility of this desire, ‘made do’ with a less desired option. An exceptional phenomenon of ‘making do’ is the popularity of fake bathrooms in Peru – a toilet with the shower and sink features even if the household was not connected to the water network! The poor are looking for a compelling offer and a better buying experience – one where quality products are affordable (or supported by financing) sold through a credible agent that presents options and complete solutions (such as all in -- labor and materials installed at the doorstep).

5. Policies promoting sanitation are critical for the private sector.Myth. Sanitation policies do not all have the same relevance to the private sector. The study found that with respect to engaging the private sector in the on-site sanitation market, the impact of current sector policies was limited. On the other hand, current policies do not seem to have hindered private action – the majority of poor people still look to the private sector to assist with self-supply. Interviews with enterprises directly providing services portrayed a situation where policies and government agencies were largely seen to be of no consequence. In Bangladesh, nearly all surveyed enterprises said they did not know, when asked for an opinion about the clarity of rules and standards for sanitation, while 55% of firms in Peru disagreed or strongly disagreed that rules were clear as did 50% of firms from Tanzania. Asked whether sanitation promotion programs were well publicized so that firms can look out for business opportunities, a similar pattern of responses emerged. The responses seem to reflect that public policies could be more relevant if they aimed at lowering specific barriers or addressing risks that the private sector perceived. So far, general statements of support and sanitation programs geared towards implementation through public institutions do not matter to the private sector.

And the one truth we confirmed…

Scaled delivery of sanitation service is constrained by the fragmentation of the supply chain.Truth and perhaps, more than we knew before. Currently, final delivery of sanitation either rests on households themselves or on micro- and small firms reliant on customization at the local level. Present solutions are not amenable to mass production and distribution. Why? Part of the answer is that the present supply chain is not geared towards generating value for sanitation - it is mainly a construction supply chain where inputs pass through agents for whom sanitation is a small part of their business – no one is innovating and vertically integrating inputs. Linked to the fragmented nature of the supply chain is that the cost of inputs carry high embedded costs of transport, which does not only add to the final price of sanitation construction, but has implications on the timeliness at which installations happen – often having the effect of sanitation being literally, out-of-reach. Transport and delivery is estimated to add between 10 to 20% of the inputs prices from wholesale or national seller to the local firm dealing with households. Transporting heavy and bulky items like cement slabs and rings is costly and difficult for households – sometimes resulting in breakage while in transit, which for them is a huge investment down the toilet. The reality is that under the current supply structures, households require a lot of coordination increasing the hardships in installing a toilet.

Comments

Why we consider that the success or failure of any development sector (e.g. sanitation)purely depend up on its success or failure of generating a business opportunity? What is our objective? Is it to find sustainable solutions to the Sanitation problem or is it to pursue the scope of a good business arising out of sanitation problem?

Thank you for the comment. Our interest is understanding whether local businesses can support the delivery systems for sanitation. It is happening already - i.e. most households in the developing world have addressed their sanitation needs through self-supply. We are interested to know if such businesses are looking to serve more poor households and what might be constraining them.

At Sanergy, we agree strongly with Jemima's findings through our work to provide hygienic sanitation in one 500,000 person informal settlement in the south east corner of Nairobi. Here is why our experiences in the field support her view from the World Bank.

1. “Firms serving the base of the pyramid are predominantly micro firms because the market is small.” Myth.

FACT: In the last two years, Sanergy has grown organically to build a well-oiled franchise network of 170 micro-entrepreneurs running 330 Fresh Life Toilets. We’ve become the largest provider of hygienic sanitation in Mukuru in a very short time. We’ve created about 400 jobs including micro-entrepreneurs, their staff, and our staff who provide a range of critical services – waste collection, marketing and branding, and business operational support.

2. “Sanitation is a low margin business.” Myth.
FACT: The number one reason that our micro-entrepreneurs invest in sanitation is because they understand the consequences and therefore the opportunity of inadequate sanitation. So far, our 170 Fresh Life Operators, who each own an average of 2 toilets, are earning a yearly profit of $2000 (this is based on 50 users per day per Fresh Life Toilet, and a customer fee of $0.06 per use). The daily operating costs of each toilet is about $0.30, while revenue is about $3. It’s a pretty healthy business. We even make the financing easy for the entrepreneur by offering a 0% interest loan through Kiva – the online micro-lending platform.

3. “Lack of interest in sanitation is driven by the lack of money.” Myth.

FACT: Affordability is only one part of the equation that drives interest. Convenience, habit, and cleanliness are just as important if not more so. For our operators, 90% of users come from only 25m away to use Fresh Life Toilets. If we get toilets close to where people are living, then they will use them. At the same time, we recognize that people have resorted to practices such as flying toilets and pit latrines for a very long time. We are working to unwind people’s habits of using unhygienic sanitation and adopting ours. We have a variety of strategies to do this, such as loyalty programs, vouchers, and aggressive marketing throughout the community. We put Fresh Life front and center of people’s lives. Finally, the toilet has to be clean for people to want to use it. We have high compliance standards for our operators and if they do not meet them, we shut down the toilet. While, thankfully, we have not had to do this very often, the credible punitive measure is effective for enforcement.

4. “Poor households are looking for ‘improved’ sanitation.” Myth.
Jemima points out that “To get households to invest in sanitation, they need an offer they cannot refuse: a quality, high-value facility that is within their reach.”

FACT: The Fresh Life Toilet was designed with the end-user in mind; we received a lot of great feedback from the community members through employing various HCD (Human Centered Design) techniques. Residents demanded hygienic sanitation that “felt like a home” and so we use thin-shell cement walls and, in our next iteration, a tiled floor. Residents wanted a facility that was close to where they were living for safety reasons, so we ensured that it was a compact design – only 3ft by 5ft – meaning that we can install just about anywhere in the densely built-up slums. Residents wanted a well-lit facility, so we offered a translucent roof and a solar lantern. Residents wanted to be able to check themselves out, so we installed simple mirrors inside the facility. And finally, although it’s expensive, we use a bright blue paint on the outside that is eye-catching and attractive. All these elements give our customers what they want to generate demand.

FACT: Policies promoting sanitation are not as critical as well-regulated and well-articulated regulatory framework which enables private sector participation. Sometimes, we feel that the process of dealing with the many layers of government is Kafka-esque: every door that we go through leads to another door and the finish line keeps shifting. The government needs to create the enabling environment, but does not need to overly incentivize the private sector to participate. Sanergy has already taken important measures to support this by working with the Ministry of Health and other partners to co-convene the first ever private sector sanitation delivery Technical Working Group. As Sy says, the private sector is already excited to be there.